Aegon AM: We do not expect policy changes from Fed, ECB & BOJ
It’s a busy week for central bank watchers. The BOJ had kicked off on Tuesday morning, with no policy changes in Tokyo. Later this week the Fed, ECB and BOE will have their meetings. We do not expect policy changes from these banks. But even without any changes these are important meetings for many reasons.
With the BOJ (Bank of Japan), Fed (Federal Reserve System), ECB (European Central Bank) and BOE (Bank of England) a handful of most important central banks have their policy meetings this week. All four central banks are grappling with uncertainty stemming from the Middle East conflict and its impact on energy prices, creating a challenging environment where they must balance inflation risks against economic growth concerns.
The common theme: Energy inflation
Our view is that all banks will take a 'wait and see' approach. For now, central banks can still sit on their hands. But with the enduring conflict in the Middle East, oil prices continue to remain elevated.
In case there is no conflict resolution and fall of energy prices, we think some central banks, including the ECB and BOJ, have no option to keep sitting on their hands. Then action is needed and central banks should tighten policy to be ahead of any second order effects.
And even in the case of a resolution, it could take a serious time for the energy situation to fully normalize. It will take months before the Strait of Hormuz is fully open and safe to pass through. And it could take years until energy infrastructure in the Middle East is restored and capacity of energy/oil is back to full capacity. With this in mind, central banks must take a medium-term view as inflation forecasts have a stickiness.
Fed: Powell’s final act
The Federal Reserve is expected to leave interest rates unchanged at 3.50%-3.75% at its meeting. This is likely the last meeting chaired by Powell, and the meeting is overshadowed by political drama surrounding the leadership transition.
Last week, the Justice Department dropped its criminal investigation of Fed Chair Jerome Powell, clearing the path for Kevin Warsh's confirmation as Powell's successor.
This week, the Senate Banking Committee will vote on Warsh's confirmation on Wednesday. Wednesday's press conference will be closely watched for any clarification on Powell's next steps and whether he will remain as a Fed governor.
We expect the Fed to shift its communication moderately toward an explicitly two-sided risk outlook -rate cut or rate hike -while keeping rates on hold this meeting.
This is a tamer April meeting with no dot plots update, and likely no action. The main purpose will be to keep the door open for June.
Looking back on 8 years of Powell
At the same time, this meeting marks the end of Powell’ eight year tenure as Chair of the Fed. His presidency was defined by extraordinary challenges. Powell steered monetary policy through the COVID-19 pandemic, deploying aggressive stimulus before pivoting to combat surging inflation with rapid rate hikes.
His chairmanship maintained moderately restrictive policy despite persistent White House pressure for much lower rates. And related to this pressure, Powell (and other Fed governors) faced strong pressures to resign from their roles.
One could ask the question what has been the most important achievement of Powell. Steering the Fed through the Covid Crisis, or defending the Fed independence. Both were pivotal moments during the past eight years.
ECB: Waiting for Clarity
The ECB is set to leave its key interest rates unchanged upcoming Thursday, as it awaits clarity on the duration and scale of the energy shock accompanying the conflict in the Middle East.
Euro area inflation expectations have risen sharply. The energy crisis has once again revealed Europe’s energy-dependency weakness. With the higher energy prices, the inflation dynamics have changed rapidly from 'under control' a few weeks ago to 'too high and uncertain' now.
We expect the ECB to continue the 'wait and see' approach for now and to keep a June rate hike open. We expect the ECB to hike at least once this year – likely in the summer - with a possibility for a second hike later this year. But this path really depends on the energy prices. We therefor argue that the Eurozone’s in now being set in two places: Frankfurt and Hormuz.
As noted above, we expect one, and possibly two, interest rate hikes by the end of 2026. This outlook is somewhat less hawkish than current market pricing, which anticipates as many as three rate increases before year-end. In our view, the initial market reaction -at one point pricing in four hikes for 2026 -was overly aggressive. We therefore maintain a less hawkish stance than the market.
This assessment is closely linked to our broader macroeconomic view. While the energy crisis clearly has a strong inflationary impact, it is simultaneously eroding purchasing power and weighing on demand. We therefore expect a degree of demand destruction and have lowered our growth forecasts accordingly. As a result, growth and inflation are likely to exert opposing forces on the economy. In such an environment, we believe the ECB will have limited scope to tighten monetary policy aggressively this year.
BOE: No action with Gilt market under pressure
We expect the BOE to act in line with the ECB. The BOE is set to leave its key interest rates unchanged at 3.75% this Thursday, as it awaits clarity on the energy shock from the Middle East conflict.
The BOE could revise upward near-term growth and inflation forecasts.
In the interest rate global market turmoil, UK government bonds have taken a hard hit. Rates on 10-year Gilts are up more than 45bps versus three months ago. This is a bigger impact than the US (+10bps), Germany (20bps) and Japan (+20bps). This move is driven by two currents: Higher inflation expectations as a result of the global energy crisis and – additionally - political unease and uncertainty around the future of Keir Starmer as UK prime minister.
BOJ: A Hawkish Hold
The BOJ’s decision this morning was in line with our expectations. The policy rate was kept steady at 0.75%. Interestingly, the 6-3 vote represents the biggest divide under Governor Kazuo Ueda's governorship, suggesting swelling pressure to normalize policy. We label today’s decision as a hawkish hold, setting the stage for similar outcomes for other central bank meetings later this week.
